Asia currencies decouple from China’s yuan


The former is losing tracking as recovery paths from the virus diverge
Newsfeed24 Sep 2020
Photo credit: AFP Photo


Counting on China as an anchor of strength has been a good tactic for traders of Asia’s emerging currencies. That link is losing traction as recovery paths from the coronavirus pandemic diverge.

Asia’s two-speed recovery is making it difficult to predict the fortunes of the region’s exchange rates amid mounting headwinds ranging from US-China tensions to the American presidential election.

“Given that much of the strength in the yuan is related to China’s economic resilience, which has not been replicated in much of the rest of the Asia, this suggests that yuan appreciation is going to continue to have a less pronounced impact on Asian currencies,” said an analyst. “Idiosyncratic factors have become more important for regional currencies.”

China’s gathering economic recovery has seen the offshore yuan strengthen 4.1% this quarter, beating all its developing Asian peers. The South Korean won is in second place, having gained 3.3%, while the currencies of Thailand and Indonesia, facing some of the largest economic challenges from the pandemic, have weakened.

While the yuan’s correlation with other emerging-Asian currencies seems to be breaking down, its relationship with those in the G-10 countries appears to be rising. The Chinese currency is increasingly influencing weekly price changes in the pound and commodity-linked currencies such as the Australian, New Zealand, and Canadian dollars, according to market analysts.

Domestic risks are likely to hinder emerging Asian currencies from keeping pace with the yuan, even as the Chinese currency’s strength and the weakening dollar create a favourable environment, said a currency strategist.

Weak exports will probably damp sentiment toward the won, while debt monetisation concerns weigh on the Indonesian rupiah, and the rupee will be hurt by India’s worsening virus outbreak, he said.

“The macro recovery in the rest of Asia has been choppy and uncertain at best, and there is also no strong portfolio inflow momentum,” he said. “These factors will cause the rest of the Asian currencies to lag behind.”– Bloomberg News.

The US Dollar Index closed 0.43% higher to settle at 94.389, the euro fell 0.41% to USD1.1660, the pound slipped 0.07% to USD1.2724, and the yen weakened 0.44% to 105.39 per dollar.

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